Performance Measures:
Lagging Indicators
By: Jeff Koch
Todd Devenburgh
Kate McDermott
Lagging Indicators
A lagging indicator follows a series of
events. It shows the final results of what
already occurred.
 Most financial statements are a lagging
indicator because it reports where a
company has been and trends throughout its
history.

Using Financial Ratios As Indicators

Through using ratios it eliminates any
problems in comparing companies due to
the company size and complexity. All ratios
divide out the same in any corporation
leaving only percentages, multiples, or
times. Some may seem illogical and
impractical, but are for comparative reasons
only.
Reasons?

Internal:
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Manager evaluations
Manager compensation
Division comparison
Historical data

External:
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Short-term creditors
Long-term creditors
Investors
Suppliers
Credit rating
Competitors evaluation
Financial Ratios
Return On Equity (ROE)
 Return On Assets (ROA)
 Current Ratio
 Quick Ratio
 Cash Ratio
 Inventory Turnover
 Profit Margin
 Return On Investment (ROI)

ROI

Return on Investment- Used to evaluate the
efficiency of the investment. It is often
used to determine how well the company is
managed.
Short-Term Ratios

Current Ratio- best known and most widely
used ratio. It shows the liquidity of the
firm.

Quick Ratio- uses the same concept as the
current ratio, but omits inventory to show a
more accurate financial performance.
Short-Term Ratios

Current Ratio =
Current assets
Current liabilities

Quick Ratio = Current Assets-Inventory
Current liabilities
Profitability Ratios

ROE- defines how much money the
company returns to the stock holders for
every dollar in equity.

ROA- is a measure of profit per dollar of
assets.
Profitability Ratios

ROE = Net income
Total equity

ROA = Net income
Total assets
Controversy
1.
2.
There are many ways to computing these
financial ratios and sometimes are
computed differently to make the
company appeal better to investors.
It is previous information about the
company and does not show current
changes or trends in the economy or
company.
Non-Financial Measures
Delivery time
 Quality
 Feedback and customer satisfaction
 Post-sales support
 New product introductions
 Order fulfillment times
 Marketing approach

Example: Motorola
ROA = 2.02 (avg. over 5 years)
 ROE = 4.90 (avg. over 5 years)
 Inventory turnover = 11.39
 Quick ratio = 1.98
 Current ratio = 2.18

All figures were reported in the company’s 2005 annual report.
Example: Verizon
ROA = 4.72 % (avg. over 5 years)
 Gross Margin = 67.5 %
 Profit Margin = 10.99 %
 Inventory Turnover = 9.32
 Current Ratio = .84

All figures where reported in the company’s 2005 Annual
Report
Questions